Union Budget 2017: Economic Survey says GDP growth may slow to 6.5%

Economy will recover from the impact of demonetisation in the next fiscal and it could grow between 6.75% and 7.5%

The economy clocked 7.2% in the first half of the current financial year. (Reuter)

The growth in gross domestic product (GDP) is expected to slow 0.25-0.5 percentage point from a baseline forecast of 7% in 2016-17, mirroring pangs of demonetisation, the Economic Survey said on Tuesday. However, the economy will likely recover in the next fiscal and could grow between 6.75% and 7.5%, it said.

The economy clocked 7.2% in the first half of the current financial year. However, consequent upon the radical measures initiated in November 2016 in the form of demonetisation of R1,000 and R5,00 currency notes, the economy will likely experience a slowdown in the growth rate that could be lower than the first advance estimates of 7.1% firmed up by the Central Statistical Office, the survey said.

The estimate of Central Statistical Office, however, didn’t consider the impact of demonetisation while putting out the advance estimate of 7.1% for the fiscal 2016-17.

“Even the likely reduction in the rate of real GDP growth of 1/4 percentage points to 1/2 percentage points relative to the baseline of about 7% still makes India’s growth noteworthy, given the weak and unsettled global economy which posted a growth rate of a little over 3% in 2016,” the Survey said.

“That India managed to achieve this high growth in the aftermath of demonetisation and amidst the global slowdown, along with a macro-economic environment of relatively lower inflation (unlike a generally higher inflation in the previous episodes of high growth), moderate current account deficit coupled with broadly stable rupee-dollar exchange rate and the economy treading decisively on the fiscal consolidation path, makes it quite creditable,” the survey said.

Still, challenges persist. The investment to GDP ratio has not only been lower than the desirable levels but has been consistently declining over the last few years – from 34.3% in 2011-12 to under 30% in the last fiscal year. This trend needs to be reversed at the earliest in order to realise higher and lasting economic growth.

Similarly, the savings rate will have to be raised, so that investment can be financed without resorting to high dose of external financing.

After remaining fairly stable for much of the last two years, international prices of crude oil have started to trend up.

This along with rise in the prices of other commodities like coal, etc, could exert inflationary pressure and have the potential to adversely impact the trade and fiscal balances.

The outlook for the next financial year suggests that growth is set to recover, as the currency in circulation returns to normal levels and taking into account the significant reform measures initiated by the government.